Rapaport Magazine

Department Stores Merge to Survive

Japan Market Report

By Kazuko Ito
RAPAPORT... Mitsukoshi and Isetan Department Stores, Japan’s number one and two ranking department stores by sales, announced on August 17 that they had agreed to merge into a holding company by next spring. The Mitsukoshi-Isetan merger is the latest in a wave of consolidations sweeping the department store industry. Sogo and Seibu merged their operations in 2003. Daimaru and Matsuzakaya have announced they will be integrating their operations in September, followed by Hankyu and Hanshin, who will merge the following month. Once all four mergers are finalized, there will be four mega-department store groups in Japan, each selling more than $8 billion annually.

No Retail Rebound

Despite the government announcement that the country is stretching into its longest economic expansion in recent history, the boom has not been felt by retailing sectors across the board, except for electronics, cell phones and exports to emerging markets. In fact, business daily Nikkei reported on August 15 that the overall sales of department stores dropped another 0.5 percent in 2006 over the previous year, the latest in a series of annual declines. At the same time, Nikkei predicted that the economic environment for department stores will continue to look bleak.

The problem is Japan’s rapidly shrinking population. “The department stores have come to realize that competing for market share against each other will not help them survive for the next generations,” said Michio Fukui, president of Fukui Diamond Co., Ltd. and also president of the Tokyo Diamond Exchange (TDE). “They are being forced to reorganize themselves before they are hit by the worst possible challenge — losing customer base.” According to a recent study, Japan’s population, now at 128 million, will drop to 98 million by 2025, based on the current birth rate of 1.32 per woman. The impact of the declining birth rate is being felt in every aspect of the social, economic and political sectors of the country, and for retailing in particular, there’s no time to waste in reorganizing.

“During the 1990s, when recession hit the country, jewelry manufacturers were forced to reorganize drastically,” recalled Hidetaka Kato, chairman of Kashikey Co., Ltd. “Many of the manufacturers’ staffs and personnel at that time were absorbed by the retailing sector. Now, with the country’s population aging, it’s time for retailers to reorganize. Merging department stores is one way to reorganize. The changes will be felt gradually throughout the country.”

Selling Overseas

For the last half of the century, with its strong economic recovery from World War II devastation, Japan has been a good consuming market, not just for the Japanese marketers, but also for foreigners. International name brands have snatched substantial market share for their value-added products with sophisticated marketing and advertising. Will Japanese marketers look to markets outside Japan, like the foreign marketers looked at Japan? “One day, they will,” said Kato.

There is good potential in the emerging markets of China, India, Russia and Dubai, continued Kato. But Japan has had little exposure in these countries, particularly with jewelry items. Will these markets accept Japanese tastes? What about Japanese labor costs that are in no way competitive with those of these emerging countries? According to Kato, it is not labor cost, but added value that attracts consumers. He mentioned Koshihikari, a Japanese branded rice, as an example. Koshihikari is about five to six times more expensive than the rice produced in China. But when Koshihikari was put on sale in Shanghai’s department stores, it sold out in no time. “People in China found Japanese rice tasty,” said Kato.

Kato is of the opinion that in order for jewelers to be profitable and capable of marketing in foreign countries, they must have skills and expertise in adding value to products and in meeting consumer satisfaction with their marketing and advertising. Unfortunately, for small jewelers, who account for a large part of Japan’s jewelry industry, these are next to impossible tasks.

Gems International Co., Ltd. recently reproduced an exact replica of a national treasure — an ancient, four-string Japanese lute — with pearls and precious metals. Tanaka Kikinzoku Co., Ltd. made a Japanese teapot in 24-karat gold. “I applaud their efforts,” said Kato. “This kind of publicity will contribute to helping foreigners understand our culture, which is the essence of Japanese-made jewelry. One day, the world consumers will appreciate what we have in our tradition.”

At the moment, there is only a handful of Japanese companies who are ready, willing and capable of marketing products outside Japan. Kashikey is one of them. The company has been selling its Brown Diamonds brand to Hong Kong and to Shanghai through Chinese chain store partners. The Chinese buying habits are quite different, Kato admitted. “They buy by price points and when the price tag exceeds their price points, they won’t buy. On the other hand, Japanese consumers must like the piece first and foremost. When they buy, the price points become secondary.”

The Marketplace

• The market is still in summer holiday mode with very little activity in the wholesale markets.
• A number of trunk sales are being held for consumers but unit prices are reportedly low.
• The U.S. subprime problems are being felt in the Japanese financial market.
• The yen suddenly got stronger, making domestic prices higher for foreign buyers.
• Large stones are becoming more and more scarce.

Article from the Rapaport Magazine - September 2007. To subscribe click here.

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